PayPal: Max Levchin (Part 1 of 2)

During its formative years in the late 1990's, Paypal attracted an extraordinary group of young entrepreneurs, who then went on to build some of the best known companies in tech. They became known as The PayPal Mafia—and Max Levchin was one of the leaders. A computer genius from Soviet Ukraine, Max joined Peter Thiel, Elon Musk, Reid Hoffman and others as they grew PayPal into a massively successful online payment service. Along the way, they encountered almost every start-up challenge imaginable, including the emotional ouster of Elon Musk as CEO. After PayPal was acquired by eBay in 2002, Max couldn't sit still, so he launched a startup lab that eventually led to another successful fintech company: Affirm. Guy will talk to Max about Affirm next week, in the second episode of this two-part series. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Guy Raz?

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• 0:46Guy Raz?

  build the prototype, analyze the market, maybe even come up with the idea, what separates the people who actually build something from everyone else? I don't have a clean answer yet, so I've been sitting with it with Claude. There's hope in hard questions. Ask yours at claude.ai/hibt. We get support from U.S. Bank. A question I love asking founders. What's the one decision you almost didn't make? The one that changed everything? Because it's never the obvious stuff. It's never, I decided to start a company. It's the small, boring, Tuesday afternoon decision you barely remember making until you realize it's the reason everything after it either worked or didn't.

• 1:32Guy Raz?

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• 2:14Guy Raz?

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• 3:40Guy Raz?

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• 4:23Guy Raz?

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• 5:07Guy Raz?

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• 5:52Guy Raz?

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• 6:17Speaker 01

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• 6:47Speaker 02

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• 7:19Speaker 03

  2001, for me, was largely a year of trying to scale this thing as it was just blowing the doors off with its growth. Every week, the growth would just be so much more than the systems could handle. Every Monday, when eBay auctions would settle, the system would just go down for multiple hours. And at some point, our head of database scalability, who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the Monday blues because we all knew the site would crash.

• 7:57Guy Raz?

  Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

• 8:08Guy Raz?

  I'm Guy Raz, and on the show today, how Max Levchin took an idea nobody cared about and transformed it into PayPal, a brand that embodied startup culture with its rapid rise, hairpin turns, and world-famous founders.

• 8:28Guy Raz?

  There are just a few companies in tech whose overall impact went a lot further than just the products they produced. Hewlett-Packard is a classic example. It's not the computers or printers they made that matter, but the fact that David Packard and Bill Hewlett were pioneers who laid the foundation for what is now known as Silicon Valley. Atari is another one. Sure, Nolan Bushnell's video games and consoles were cool, but what matters more is how Atari ushered in the video game revolution that's now a massive force in global entertainment. And then there's a company called PayPal. Yes, it may be convenient to pay someone using PayPal,

• 9:11Guy Raz?

  but its products aren't nearly as important as the legacy that came out of it. The group of people who helped launch PayPal back in the late 1990s would go on to either found or fund companies, including YouTube, Tesla, Facebook, Yelp, Flickr, LinkedIn, Mozilla, Palantir, and many more. You may have heard the phrase PayPal mafia, a term popularized by Fortune magazine in an article that came out in 2007. The PayPal story is full of public drama and private intrigue, and not surprisingly, has focused on its three best-known founders: Peter Thiel, Reid Hoffman, and Elon Musk.

• 9:54Guy Raz?

  But the guy who actually had the earliest idea for PayPal is Max Levchin. Max is a gifted computer scientist and coder who founded his first companies as a student at the University of Illinois. In 1998, he launched a tiny cryptography company with Peter Thiel that would evolve into PayPal. Max would eventually go on to help start several other companies, including Affirm, a payment platform that lets you pay for things in installments.

• 10:24Guy Raz?

  Max's story is so rich, so full of anecdotes of the now famous founders he once worked with, and so full of lessons for anyone hoping to launch anything of value, that as the two of us were talking, I kept wondering how we were going to keep it all to a single episode. So we decided not to try. Instead, we're going to tell Max's story in two parts. In this episode, part one, you'll hear about his early years, the launch and growth of PayPal, and its eventual sale to eBay. And next week, part two, everything Max did after PayPal, including the company he's most involved with today,

• 11:05Guy Raz?

  Affirm. Max Levchin was born in the mid 1970s in Ukraine, when it was still under Soviet rule. As a Jewish family, the older generation of the Levchin clan faced a lot of hardship.

• 11:19Speaker 03

  Both my grandmother and grandfather come from fairly large Jewish families. My grandfather came from a family that was largely incarcerated by the Soviet state during the 1930s persecution of Jews and other intellectuals. All throughout the first half of 20th century, my grandfather's family found its various members in the gulags. And so by the time I met my grandfather, he had already lost most of his brothers and sisters. And the reason he and my grandmother

• 11:57Speaker 03

  survived, they were both physicists, and they were both involved in some defense-related work for the state. So as the Germans approached Kiev, they were both sent very far off into Siberia to help the war effort from far away from the frontlines.

• 12:18Guy Raz?

  And from what I understand, when you were growing up, your mom was also a physicist, right?

• 12:24Speaker 03

  Yeah, she was employed at the Food Sciences Research Institute, which sounds very boring, but she had a really cool job. She was measuring foods for radioactive contamination. And before Chernobyl, that was the very boring job. And then after Chernobyl, it became a very exciting job, not in a good way.

• 12:44Guy Raz?

  So your mom worked for the state and was a scientist and your dad was a...

• 12:52Speaker 03

  He was a writer, although he too had a chemistry degree, as a matter of fact. But his calling was the fine arts.

• 12:59Guy Raz?

  And did you speak Russian at home or did you speak a Ukrainian dialect?

• 13:03Speaker 03

  We spoke Russian and my grandparents, who lived with us, spoke Yiddish to have an encrypted channel from the young ones.

• 13:12Guy Raz?

  Was your family at all religious? Did you have any Jewish identity or did they sort of stay away from it because it was, you could be persecuted in the Soviet Union if you practiced religion or Judaism, right?

• 13:26Speaker 03

  I definitely identified as Jewish, but had zero understanding of the religious identity or really the historical identity. So I knew nothing of Jewish holidays, but amusingly enough, one of the things that happened, so first of all, I guess I was in the tracked program most of my life. So I would get into this math and science special track. And inevitably, because the Soviet Jews were so obsessed with education, I would get to this new class and it would be like half Jewish. And one time, a teacher made a joke and it was very much an anti-Semitic slur. And all of us kind of were a little stunned because like normally it came from other

• 14:08Speaker 03

  kids, didn't come from teachers, but it also just happened all around us. So it wasn't like that huge of a deal. And then after class, some kind of a spontaneous movement began where like, you know what, we shouldn't put up with this. Like this, this isn't okay. And so we somehow talked ourselves into submitting a formal complaint to the school about antisemitism.

• 14:29Guy Raz?

  Wow.

• 14:29Speaker 03

  At the time, we seemed just completely misguided because like, maybe we'd still get kicked out of school. But I think both the school and the teacher were so shocked by all these preteen, early teen Jewish kids getting worked up about being called, you know, the equivalent of a, you know, unprintable word in class, that they ultimately censured the teacher. And we're like, yeah, you can't really teach this class anymore. Which in retrospect, I think my parents were like, what are you doing? You're gonna get kicked out. Like, this is gonna jeopardize your chance of getting into a good university. And in retrospect, I go like, yay, me. That was cool.

• 15:05Guy Raz?

  Okay, so I've read that as a kid in Ukraine, you were, you were already getting into computers, right? Like, you were already learning about, about programming, right?

• 15:16Speaker 03

  Yeah, it's a whole collection of really lucky coincidences. So as my mom joined this food science research institute, the state gave her an order to learn how to program. And she wrote me into it and basically said, look, you know, I'm not really sure I understand how this stuff works. Help me out. And so that was my first kind of rabbit hole into programming. And within a few months, I was a better programmer than my mom and then better programmer than her colleagues. And I was just gorging myself on all, all the knowledge that I could get from bootleg translations of various computer science books. And so by the time I got to the US, I was completely hooked on the idea of writing software. And I knew that I wanted to be a software engineer. I knew I wanted to go somewhere, sort of beg,

• 16:00Speaker 03

  borrow and steal, get my way to a keyboard and a monitor.

• 16:03Guy Raz?

  Soviet Union collapses in 1991, officially in Ukraine would, would become an independent state. And today we're seeing the, the, the long tail of that story. Your parents decide to immigrate to the United States.

• 16:20Guy Raz?

  First of all, what did they, I mean, what were they gonna do when they got to the, what was their plan when they got to the US?

• 16:26Speaker 03

  I'm pretty sure they had no plan.

• 16:28Guy Raz?

  But they just knew what they wanted to get out?

• 16:30Speaker 03

  So a couple of things led to it. So my grandfather in particular, but also my grandmother, were generally speaking, apparently quite dissident in their views. And I wouldn't know it, even though they lived with us. So my grandfather, he and my grandmother have been scheming to get out of the country since maybe the 70s, certainly all through the 80s. And two things happened. In 1986, my grandfather died quite suddenly, and my grandmother retired, and she completely disappeared from the spotlight. She was an internationally known astrophysicist. And actually, one of the coolest things I found after I came

• 17:11Speaker 03

  to the US is my grandmother's research papers in the Harvard library, which was like a...

• 17:18Guy Raz?

  Wow.

• 17:18Speaker 03

  I did not know this was the thing, but...

• 17:20Guy Raz?

  Your physics royalty?

• 17:23Speaker 03

  I am a physics royalty adjacent. But she was an amazing woman, and it's completely appropriate that she has papers in the Harvard library. But my grandmother decided that she would get us out, the entire family. And so she engineered this mass exodus of the left-wing Klan while basically dying. She had breast cancer that was fairly aggressive all throughout this process. And she just sort of said, you know what, screw this, we're getting out. And so I don't think they had a plan. They just had an opening where they realized that Soviet state was falling apart. She had to bribe a Soviet official to give

• 18:03Speaker 03

  her a new birth certificate. And suddenly, we found ourselves on a plane to New York.

• 18:09Guy Raz?

  Wow. So you were let out, and you'd land in Chicago in 1991. So what did your parents do for a living when they got there?

• 18:19Speaker 03

  My father, a man of arts.

• 18:23Speaker 03

  Spent a bit of time painting signs for shops on Devon Street, which is kind of a main drag in north side of Chicago. And my mom babysat for the first, I think, 10 years of our life in the US.

• 18:37Guy Raz?

  And did they speak English?

• 18:39Speaker 03

  My mom spoke decent English and my dad did not.

• 18:43Guy Raz?

  You were a 16 year old kid. Did you speak English?

• 18:45Speaker 03

  Yes, they started me on it at two, I think. There are tapes of me trying to speak English as a two year old.

• 18:52Guy Raz?

  Wow. All right. So you could integrate into the school system, you're a brother. You're a junior high school, basically. And was it hard for you when you got to school?

• 19:02Speaker 03

  So academically was not. I definitely had my fair share of you're not from around here type conversations. But I was fortunate in the sense that I went to a very normal intercity public high school in Chicago. It was something like 30% black, 30% Asian, 30% everything else, 10% people you didn't know existed. It was just some sort of a very, very, very integrated mix of anyone and everyone. And so this was not a, oh, wow, you're not from around here. It was more of a, oh, you're one more of these people who speaks with a funny accent and does math really well and plays clarinet. Okay, you know, we have three of you over there in the corner.

• 19:45Guy Raz?

  Yeah.

• 19:46Speaker 03

  I attracted every stereotype.

• 19:49Guy Raz?

  So I read a story that you knew about MIT and that was your dream to go to MIT. And you talked to your school counselor about it, but you were steered in a different direction, not to MIT.

• 20:03Speaker 03

  Yes, this is a, one of these, you laugh, you cry, you end up in a different university stories. So I don't remember actually whether this was the way it was formally translated or the way I translated it. But in my from English to Russian, back to English translation of MIT, it became MTI.

• 20:22Guy Raz?

  So you talked to your counselor and said you wanted to go to MTI?

• 20:26Speaker 03

  Yes, I was bearing Sistin, I really wanted to go to MTI. And she said, well, I just don't think I know the school.

• 20:32Guy Raz?

  Who's heard of MTI? The Montana Technical Institute?

• 20:35Speaker 03

  I think my counselor may not have heard of that one either. But she basically said, like, you'd never taken an ACT, you'd never taken an SAT. You're as fresh of the boat as they come, just like, you know, get your bearings and then you'll, you know, you'll, you'll, you'll get to the right university. And so I was quite discouraged, but fortunately I met this great guy named Eric, who is still one of my very closest friends. And I said, all right, I'm, I really want to go do computer stuff. Where do I go? And he said, you know, the brightest kids from this school, get into University of Illinois or Banister Champagne. And that's where I'm going to try to get into. You know, if you want, I'll, I'll show you how to get the paperwork. And that's how I ended up at U of I.

• 21:14Guy Raz?

  All right, so you get to school and you are determined from the day you get there to, to what? To become a software engineer when you graduate? Or to start your own software company or both? I mean, from what I've read, it sounds like you kind of knew what you wanted to do when you got there. Is that, is that true?

• 21:34Speaker 03

  A little bit after I got there. So I got there, I was still very much under the spell of my grandmother, who was with us. She, she actually managed to survive long enough to see the family move to Chicago. And so on my way to college, she was quite ill, like really, really ill by that point. And she basically said, look, I think you should probably consider being a professor. And that was my plan when I entered the U of I. But midway through sophomore year, I ran into a couple of guys that were starting their first company. And they sort of infected me with the entrepreneurial wanderlust. And that, that's when I knew I just needed to write code and build companies and products and businesses.

• 22:13Guy Raz?

  I mean, I mean, this was kind of a heady time at the University of Illinois. And I think Netscape was, Marc Andreessen came out of there, right? And, and, and so, you know, it was, it wasn't MIT, it wasn't Stanford, but it was not far behind in terms of like the, the innovators that, that would come out of there. But it's, it's still the mid 90s, right? It's still like early internet days. But you probably had access to, to see or to be exposed to technology that maybe.

• 22:47Guy Raz?

  Ordinary people weren't exposed to yet, even as a computer science student?

• 22:51Speaker 03

  Yeah, that's exactly what happened. And so, so all of us were kind of realizing that we're in the middle of this maelstrom of innovation and we couldn't, we couldn't know and didn't really know exactly what was happening. But suddenly, there was lots of attention to this Mosaic project that Marc Andreessen started at National Center for Supercomputing Applications. And there were all these people visiting campus and looking and the graphical browser. So Mosaic V1 launched in 93, when I entered campus. And so, I was thrust into this, the future is being made right here. Nobody knows what it looks like, but it's definitely being created right in front of you.

• 23:30Guy Raz?

  Do you, by the way, do you remember getting on that browser for the first time?

• 23:33Speaker 03

  Oh, yeah.

• 23:34Guy Raz?

  And just see, because I remember it just seemed like something totally, what is this?

• 23:39Speaker 03

  Pennsylvania Avenue, Residences Hall, Computer Lab, downstairs to the left, second computer from first row.

• 23:45Guy Raz?

  Yeah.

• 23:45Speaker 03

  That's where I was when I saw my first copy of Mosaic. And I actually remember thinking, well, this isn't that big of a deal, except the embedded images are crazy cool. Like, this is just like all these other text, sort of hyperlink navigating things that I've seen before. But the images right alongside the text is just like a completely different experience. It's like reading a book. And that was pretty amazing.

• 24:10Guy Raz?

  While you were in college, you, you already started to connect with other students to found, like start businesses, right?

• 24:20Speaker 03

  So I think a lot of the, the immediate reaction to, to things, the launch of Mosaic and kind of the, like, oh, my God, this is different and important and everything will change now. Plus, wow, Marc and five other people just upped and left campus and went to Palo Alto, California, which seemed like, you know, going to the Mars, to start a company. And that, that construct was so cool and so inexplicably desirable.

• 24:48Speaker 03

  I ran into these people who were kind of hanging around the same computer science circles and they're like, hey, we're gonna go start a company. You should join us because you're one of these guys who doesn't sleep, doesn't eat, just writes code. And I was like, that sounds great. I don't really know what we're gonna do. And yeah, we don't know it either, but we're just gonna go start a company. It doesn't matter what it's gonna do. And what we kept on trying to do is answer the question, okay, so the world today looks like this. Now, ad web. So advertising exists on TV. It exists when you drive Highway 57 from Chicago to Champaign. What happens to advertising when everyone has a web browser? We should build a company around that.

• 25:21Guy Raz?

  And I know you started a number of companies around this period, which didn't quite work. But what were some of the ideas that you came up with?

• 25:30Speaker 03

  So the first one was, in fact, a web advertising, I think may have been the very first web advertising company, failed miserably for lack of funding and lack of understanding of how advertising industry really worked. Next one was an attempt to reimagine classifieds. So I looked at the back of a newspaper. I was like, oh, classifieds in a newspaper? How about classifieds plus the web? That was actually kind of vaguely successful.

• 25:56Guy Raz?

  It's a great idea.

• 25:57Speaker 03

  I thought so.

• 25:58Guy Raz?

  And successful in which way? Like, like people were paying money for it?

• 26:01Speaker 03

  Yeah. My friend and I started that and he would literally call small regional newspapers, like an Upper Peninsula Michigan newspaper with circulation of 200, and would say, do you guys have a website? And they'd say, yeah, we just got on the web ourselves. We have a website. It's like, great. You need a classifieds package because right now you sell, you make money by selling classifieds space in the back of the newspaper. Surely you will want to sell some classifieds space on your website. And so we would actually charge them SaaS fees, like $1,200 a year, I think.

• 26:31Guy Raz?

  But none of these companies that you started really went anywhere though, right? Like you didn't walk out of college with a big chunk of cash in your wallet?

• 26:39Speaker 03

  No, I walked out with student loans.

• 26:41Guy Raz?

  Right, got it, okay. But, but you, you walked out of college clearly like fired up to, to, to start something.

• 26:51Speaker 03

  Yeah. The, the very seminal moment of sort of like, this is what I'm gonna do with for the rest of my life, was when the very first company failed. We drove up to Chicago, the four of us, to try to raise money and were rejected. It was the, the advertising web business. We actually went to, um, Like Leo Burnett, one of the large advertising agencies at the time. And they were sort of like, yeah, you guys have no idea what we're talking about. It's not gonna hunt. And so then this was our last ditch attempt to save the company. So we were driving back to champagne, completely silent, the four of us in one car. And just kind of like, this is it. Like, end of the road, we're dead. And all I could think about was, what is the next company I'm gonna start?

• 27:34Speaker 03

  Like, I could not even, like, I was trying to convince myself that's like, this is a moment of grief. You need to feel bad about the death of your first company. And like, but I, but I'm not. I'm, I just can't wait to figure out what the next one is gonna do. And so when I left college, I was just sort of on this kick of like, well, number one, number two, and number three, number four, they both failed, but surely number five will succeed. And I just couldn't wait to get started.

• 28:00Guy Raz?

  When we come back in just a moment. How Max moves out to Silicon Valley, meets an up and coming small time investor named Peter Thiel, and starts a brand new business that initially goes absolutely nowhere. Stay with us. I'm Guy Raz, and you're listening to How I Built This.

• 28:29Guy Raz?

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• 29:12Guy Raz?

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• 30:48Guy Raz?

  Hey, welcome back to How I Built This. I'm Guy Raz. So it's 1997 and Max Levchin has just graduated from the University of Illinois with a bachelor's degree in computer science. He's already walked away from a few businesses that he couldn't raise money for. And now, his former co-founders are telling him to go west.

• 31:10Speaker 03

  My co-founders, number one and two, upped and left for Palo Alto because they knew you had to go there because that's where the action was. We failed to raise money. Silicon Valley was chock full of venture capitalists that were interested in giving money to people like us. And so they said, you know what? This college thing is overrated. We can drop out and go. And because these two guys, Scott and Luke, moved to Palo Alto, I knew, and we all kept in touch, and I had gotten nonstop stream of, oh, my God, it's Mecca for startups here. And you're rotting away in Champaign, Urbana. Get out here as soon as you can.

• 31:45Guy Raz?

  This is Luke Nosick and Scott Bannister, right?

• 31:48Speaker 03

  Yep.

• 31:48Guy Raz?

  They'd come back into your life, well, in 1998, because you move out there to kind of hang out with them.

• 31:55Speaker 03

  Yep, exactly. 469 Grant Avenue, apartment Q. I was crashing on Scott's floor, and Luke was in apartment P across the hallway.

• 32:03Guy Raz?

  And when you got there, what did you do?

• 32:06Speaker 03

  I sort of, because I was hanging out with Scott, I promptly became his brainstorming partner. I knew programming, and I thought myself a pretty great software engineer, but I knew that most of my failures as a startup CEO, CTO, whatever I thought I was, were because I would build things that I thought were good and easy to use. And then I would show them to someone like the classified software, and people were like, this is really great, but I have no idea how to make it work. It's so complicated. So I decided that my next sort of development phase in life would go hang out with people who are really good at product design. And Scott happens to be just a genius product designer type thinker. And so I sort of attached myself to him and would just roam around wherever he would go and say, all right, I have a product idea. And he would tell me, all right, you know,

• 32:51Speaker 03

  tell me a product idea. And I'd tell him, and he'd rip it apart and show me why it's a stupid idea and all the things that are wrong with it. And it was my crash course education in product design.

• 33:00Guy Raz?

  So you were kind of trying to come up with different ideas. And I guess in August of 98, a fateful and certainly fortunate encounter, when you went to a lecture at Stanford by Peter Thiel, we know who Peter Thiel is today. He was, at the time, presumably just a kid, you know, I think he went to Stanford and law school and worked in finance and left finance. And at that point, he had raised some money to start a hedge fund. I don't think it was a huge hedge fund. I think it was relatively small.

• 33:31Speaker 03

  It was $10 million.

• 33:33Guy Raz?

  Yeah, comparatively to what it would be today. Why did you go to that lecture? What was the lecture? And you were not a student at Stanford, but I think it took place on the campus.

• 33:45Speaker 03

  It's a funny story. So Scott's apartment had no air conditioning, as many apartments in Palo Alto do not, but it had a heater which would turn on based on some magic incantations and rules that I couldn't understand, but that it was mostly on somehow. And 98 summer, it was unbelievably hot. And so as much as I could, I would go find an air-conditioned room to just like not be drenched in my own sweat. And Stanford has all these wonderful classes during the summer, and they don't really check IDs. You just kind of roam, at least back in the 1998 timeframe.

• 34:23Guy Raz?

  Yeah.

• 34:23Speaker 03

  At the time, I would just kind of wander into a room, any room, and sleep on the back. If the lecture was big enough, nobody cared. I was sort of half-conscious of this guy named Peter Thiel, because Luke told me that this young hedge funder, Peter Thiel, he thought was really brilliant because, among other things, he was this "super crazy libertarian", quote unquote. And so as I was roaming through Stanford, looking for a lecture to crash and sleep, I saw Peter's name. I was like, oh, all right. Well, if the lecture is boring, I can sleep. And if the lecture is interesting, I could listen and see who this Peter Thiel person is.

• 35:00Guy Raz?

  What did he talk about?

• 35:02Speaker 03

  He talked about currency trading, which was fascinating, because I'd never even knew that whole genre of business existed. And more than anything, I just thought he was really bright. He was obviously a very, very smart person.

• 35:14Guy Raz?

  Did you, I mean, from everything I've read about you, you were a little bit awkward. Maybe you still are today, a little bit, which is okay.

• 35:23Speaker 03

  I suspect that hasn't changed.

• 35:24Guy Raz?

  No, no shame there. But you did have the, someone the courage to go talk to him. By the way, was it a packed lecture hall? Was it like hundreds of people?

• 35:33Speaker 03

  No, actually, the reason I didn't sleep was because it was literally six people in a tiny little room, about as big as a broom closet. And I was like, my first reaction, I remember very vividly going like, oh, my God, I can't walk out. I can't even sleep because lecturer, this Peter guy, will see me and probably

• 35:49Guy Raz?

  Yeah.

• 35:49Speaker 03

  mock me or something. So I just got to sit there and listen. He had another person who came up to him afterwards. And you could tell from the look on his face that he was not enjoying the conversation. He just looked absolutely miserable while he was being interrogated slash talked at by some random person. And so I sort of decided that my, my move would be to free him from the grasp of this, this person who was interrogating him. So I sort of came up and said, hi, Peter, I'm Max, I'm Luke's friend. And I think he probably didn't necessarily know which Luke I'm talking about, but he was like, oh, Max, yes, great, great. I'm so sorry, I have to talk to this person. And so he just kind of abandoned the guy who was torturing him and started talking to me.

• 36:31Guy Raz?

  And what did you, what did you talk to him about? Just, do you remember, did you say, I liked your lecture?

• 36:35Speaker 03

  I, I became my awkward self and basically said, well, I'm, I'm Max, I just moved here from Champagne. And so it was like a weird kind of a zero content conversation. And then he asked me what I'm up to and I said, I'm definitely going to start a company again. And he said, oh, that's cool. We should definitely talk about that. Let's meet for breakfast. I said, okay. And so how about tomorrow? Which is very indicative of how Peter Thiel generally does things that Peter Thiel does.

• 37:01Guy Raz?

  So next day you guys meet for breakfast, where, where was it?

• 37:04Speaker 03

  Was it Hobie's on Embarcadero and El Camino Real?

• 37:09Guy Raz?

  Yeah. All right. So you go for breakfast at Hobie's, legendary Silicon Valley diner, cafe. And, and you're like 22, 23, he's probably close to 30. So he's like the, you know, you're probably thinking, how this guy knows where it's at. He says, what are your ideas? And what did you, what'd you tell him?

• 37:30Speaker 03

  I came prepared. I had two ideas. One was based on a consulting gig I did while I was in Champagne. There was this company in Chicago, they would gather everything from like short clips of commercials from TV and.

• 37:48Speaker 03

  Photographs or like ripped out pages from magazines, advertising typically consumer packaged goods and they would gather this whole thing up into a database, which I would code for them. And then they would sell that database to major brands. And this was sort of a legal way of gathering competitive intelligence and nothing like this existed on the web. There are all these companies now that were marketing things on the web. And I thought this should be a competitive intelligence company for, for the web. So that was my idea, number one, and I pitched that to Peter and he was sort of like, mm, okay. And I could tell he just was not impressed. I thought it was the coolest idea in the world. And then he asked me like, all right, so like, what's your other idea? He said he had two.

• 38:28Speaker 03

  And before I fully, fully decided that I wasn't going to get a master's or a doctorate, I was very hard at work on cryptography. So the idea of secret codes and breaking and making codes. And that's, that's what I wanted to do if I were to go get a PhD. And I had this sort of half-formed idea that the world eventually would have small devices. Everybody would have a small device in their pocket. And this is long, long, long pre iPhone, but this is right around the time of the heyday of the Palm Pilot.

• 39:00Guy Raz?

  The Palm Pilot, yes.

• 39:02Speaker 03

  And then I looked at the security design of the Palm Pilot and was sort of flabbergasted to know that there was no way to encrypt anything. You could communicate with other Palm Pilots, but people could sniff the communication and just steal your secrets. And so I had the second idea called Secure Pilot, which was going to be cryptographic software for Palm Pilots. And I was very reluctant to share this because like this is a niche within a niche, like crypto, you know, security, like most people don't care about this stuff. And Palm Pilots are still in their infancy. There's maybe one million of them sold. And so I kind of blurted that one out and Peter was super excited about it. He was like, this is the greatest thing ever. Like you should absolutely start this company and I would like to invest. And I was like, I, the exact opposite of what I expected in every dimension, but sure, I'll, I'll take your money.

• 39:44Guy Raz?

  This was, because with Palm Pilots, you could like exchange addresses in through infrared, right? You'd point them at each other. And that basically, if you want, if you knew how to, or was, it was relatively easy to just suck information from someone else's Palm Pilot.

• 39:59Speaker 03

  Yes.

• 40:00Guy Raz?

  And you were like, this is a security flaw. We should develop the technology. And, and all right, so he says, I like this idea. I think we can maybe fund, invest in this.

• 40:09Speaker 03

  Yeah. He literally offered to invest on the spot. It was, it was actually like the amount of time it took him to go from, that's a cool idea and I'd like to invest. Was like fewer than a sip of his smoothie. It was just like nanoseconds. I was actually startled and was sort of like, okay, well, I guess I'm starting this company because I have an investor. Which, by the way, this was the very first investor interaction I've ever had in my life that wasn't get out, this isn't going to work.

• 40:34Guy Raz?

  And what did you know about, like, did he say, like, I'm going to give you $100,000? Like, how much money was he willing to give you?

• 40:42Speaker 03

  He asked me how much money I thought I needed to get this off the ground. And I said, I think I need about a half a million dollars. He said, great, I'll invest 300,000.

• 40:49Guy Raz?

  Wow. Okay. So, it's pretty great. And a fortuitous meeting for Peter Thiel as well, because he was, he had a $10 million fund at that point. I mean, not bad, but it's not great, not necessarily guaranteed to make money.

• 41:04Speaker 03

  Yes.

• 41:05Guy Raz?

  What was it about? I don't know Peter Thiel, I only, you know, read a lot about him and obviously his reputation precedes him and some of that may be caricature and some might not, but even as a student at Stanford, he was a bit of a lightning rod. What, why did you trust him? Because, you know, it could have gone really badly and he could have, you had no experience dealing with venture capital investments, like, you didn't probably know how to structure the terms or your equity. What was it about him that connected with you?

• 41:41Speaker 03

  I think the sort of the pragmatic answer, I had absolutely nothing to lose. There was nothing to take from me. And so, in terms of risk reward, it was sort of like, the worst that can possibly happen is I'll go from nothing to nothing. So, there's just very little downside. The thing about Peter that I think most people who don't know him just can't fully relate to, he has this amazing ability to see.

• 42:12Speaker 03

  What you are great at. And he gets so excited on your behalf to be your best self, as the kids will call it these days, that you can't just not get infected. You've become this ball of energy because this guy, Peter Thiel, you barely met, is just so excited about how talented you are in this one area and you will change the world. And he wants to be a part of it and he wants to be an investor and he wants to be a partner and your friend. And he's clearly genuine in it. And kind of go like, I didn't even know I am that good. And this guy is telling me he can see it and he's doing it with his entire body, he's that excited. And I was still knee deep in my various imposter complexes at the time. I was this immigrant kid.

• 42:57Speaker 03

  I wasn't quite sure if I dropped my accent fully and was supposed to be a PhD in computer science, but I just got a bachelor's and ran away. And he was just so genuinely excited to build this thing and to help me build it. And I think that it's the, his superpower is that he enables you to be your very best self.

• 43:16Guy Raz?

  Wow. So what, what was the next step? I mean, with a $300,000 investment, did he say, go and raise the other 200? Did he say, go start working on this? What, what, what did, did he say, go hire somebody? What did he, what did you do?

• 43:31Speaker 03

  I think he originally thought that I kind of had a plan and he would just sort of write me a $300,000 check and then off you go. And he did say like, look, you need to go line up the rest of the money because this isn't going to be enough. You just told me you need at least a half a million dollars. And so I sort of immediately went up to the fact that this is my first and only successful fundraise, so I probably could use some advice on how to do it. Said, okay, well, maybe I'll help you out. And he had this guy that worked for him in Thiel Capital Management, kind of his second in command named Kenny, Ken Howery. Kenny will help you. Kenny's very good at fundraising. He helped me. And so Kenny got to work and made me a pitch deck. And then I went in to pitch some randomly selected venture capitalists.

• 44:15Speaker 03

  And they were all one by one telling me how this will never work. It's a stupid idea. And it was just like rejection upon rejection. So at some point, I went back to Peter and said, all right, something's not working. Like you bought this and Kenny helped me with the deck. But it's just not landing with anyone. What do I do? And so I said, fine, I'll help you. And so he started coming with me on these venture capital pitches.

• 44:37Guy Raz?

  So, so basically, it wasn't the content of the pitch. It was you. You just sucked it. You weren't good at it.

• 44:44Speaker 03

  I think it may have been me.

• 44:46Guy Raz?

  Yeah. And he was charismatic and more competent than you?

• 44:50Speaker 03

  Yeah, I was very awkward and this totally did not work in venture capital, where I would show up like with a disheveled hair and a T shirt that said, Microsoft sucks or something like that. And people are like, all right, this is not a serious person.

• 45:02Guy Raz?

  At that time, at that time, that would change, of course. But at that time, it was like, right, because you probably venture capitalists were used to people with MBAs pitching them.

• 45:12Speaker 03

  Yes, I think they very much wanted to hear from someone who went to a top tier school and could speak financial language and definitely had shoes on instead of flip flops.

• 45:24Guy Raz?

  Right. But even with, even if your pitch skills weren't great, I'm still skeptical. I'm also skeptical about this idea. I don't, I would not invest in that idea. It doesn't seem that promising to me. I'm so I guess, I mean, if Peter Thiel was behind you and he probably he already had some connections, maybe that gave other investors confidence. But what were they investing in?

• 45:49Speaker 03

  I am not sure. I think that's the honest answer. I think more than anything, first of all, I mean, just to give you a sense for the success rate of these pitches. We ran out of venture capital, kind of the Sand Hill Road, classic blue chip venture capitalist community very quickly. I think we were roundly rejected by 100% of those pitches. We drove up and down Sand Hill Road and got absolutely nothing. And then we started pitching people kind of in the outskirts of the broader Silicon Valley. I remember driving to a place called, I think it was called Red Roof Ventures or something, something red rather. And it was a very long drive and Peter first drove me around because I didn't have a car. And This was a particularly memorable meeting because these people basically threw us

• 46:34Speaker 03

  out. They're like, this is a stupid idea. We don't understand anything about it. We know we have another 15 minutes in the clock, but you're wasting your time and ours too. So please leave. And so we were not successful even with Peter's cachet. And so we pretty quickly shifted into these like friends and family, wealthy people Peter knew and maybe raised money for his hedge fund. And so this was definitely not a professionally sourced seed capital, nothing like today.

• 46:59Guy Raz?

  All right. And this company that you launched was, was this the company that you called Fieldlink?

• 47:05Speaker 03

  The very original name was Fieldlink because the idea was you would have all these salespeople in the field and they would have secrets on their Palm Pilots and you would have to encrypt those secrets. That was the encrypted Fieldlink. And then it was kind of an awful name, even by my unsophisticated measure. And so I decided I wanted to give it a new name. So I spent a lot of time thinking about it and it came up with Confinity, which was confidence and infinity combined. And I was very proud of this. And then I pitched Peter and he was like, sure, whatever. Like we have bigger problems. We need to raise money. And then I told someone else and they were like, oh, like a long con. Like, okay, you're going to sell me security software by company with a word con in it? That's terrible. And so we kind of knew from day zero that Confinity wasn't going to last,

• 47:50Speaker 03

  but that was the placeholder name for a while.

• 47:52Guy Raz?

  But I think in any case, you, at this time, do get some funding from friends and family. And I think you, you managed to hire your friend from University of Illinois, Luke Nosick, right? Like to, to come out and help you.

• 48:06Speaker 03

  Yep.

• 48:07Guy Raz?

  And did you get office space? Did you like get, rent a place and, you know, put computers in and get a fast T1 line in and start, you know, clamoring at the keys on your computer?

• 48:19Speaker 03

  Basically, we got our first office for this newly renamed Confinity on University Avenue, which Peter actually placed at the time, a lot of significance on like having a cool address. Like you don't want to be in some random crappy off the grid office. You want to be on University Avenue because that signals that you're important, you're in the mix. So we got that 394 University, Suite 2.

• 48:47Speaker 03

  And we had a bunch of IKEA furniture that we self-assembled and we started typing.

• 48:52Guy Raz?

  And at some point, I think, pretty soon after, Peter Thiel, he became the CEO of this company that you started. Did you ask him to be the CEO? Or did he sort of say, you know, I should probably be the face of this thing because I'm a little bit better at presenting?

• 49:12Speaker 03

  It was very much my effort. I remember talking to him towards the end of 98. I think I was paying off a parking ticket. He made me get a car because he was tired of driving me around. So I had to buy a car and Luke had to be my co-signer because I had no credit. And so I promptly got my first parking ticket. And so I had to go to the courthouse in Palo Alto, I think, or City Hall or something like that to pay off my ticket. I was standing on the steps of City Hall, basically telling him about yet another failed attempt at fundraising and the fact that I really should just be writing code. And he was telling me like, no, no, no, you really should be recruiting your friends from college. Like, this will

• 49:54Speaker 03

  not work out if it's just you writing code all the time. You must know some smart engineers. Go get some. As we talked, I was sort of like, you clearly know what we should be doing as a company and I just want to build this thing. Like, maybe you should be the CEO. And I sort of said it out loud. And he was like, uh, no, that's a terrible idea. Like, I don't want to do this. I have this fund. It's doing really well. And I sort of like, no, no, no, that's exactly what you need to start wanting to do. And so I went into this mode of must persuade Peter Thiel to be the CEO of this company.

• 50:22Guy Raz?

  So Peter is a CEO and you are presumably the head of technology and you're trying to develop this crypto software that will encrypt data between Palm Pilots. But at some point, clearly, this shifted to a completely different business. So tell me about how you came to the realization that maybe that wasn't the right thing to focus on?

• 50:47Speaker 03

  So the backdrop, Peter and I and Kenny and Luke are all kind of roaming around Silicon Valley, trying to see if there's demand for the software that we're building.

• 50:59Guy Raz?

  Right.

• 50:59Speaker 03

  And it's becoming clearer and clearer that there really isn't.

• 51:04Speaker 03

  And there's no nicer way to put it, that no one really cares. And I remember talking to Jeff Hawkins, who created Palm Pilot and his executive team. And they're like, uh huh, yeah, you know, security, like, we totally thought about it. It'll, it'll get on our roadmap one day, but it's a consumer product. Right now, it's like address books and like, nobody's clever enough to steal things through these IR beams. But I can show you a demo where I can do that. Like, yeah, but you're like a weird kid who wants to steal things from IR beams. And so it just wasn't really of value to the market. And we basically shifted kind of back to the brainstorm mode where Scott Bannister and Luke and Peter

• 51:44Speaker 03

  and Reid Hoffman, who was Peter's friend from Stanford, and a handful of others would just stay up really late at night and brainstorm, you know, what else can we do with this tech before we call it a day? And Reid was one of the more prescient brains who was sort of like, hey, you can secure other things. Maybe you can like secure invoices or secure IOUs or, you know, secure something that kind of is valuable in and of itself. And that kind of pushed us close enough to this idea of an electronic wallet. And then there was a very short throw from that to, well, what if we just secured money? And that, that's kind of the, the starting point of PayPal.

• 52:23Guy Raz?

  Reid Hoffman, who's been on the show, was on the show a few years ago. And, um, and if you want to hear a story, you should go back and, and check out that episode. He went on to, to found LinkedIn. Was he kind of just hanging out as a friend? Or was he, did Peter like bring him on as an employee of, of this company?

• 52:42Speaker 03

  He was a board member of ours and he was running this company called Social Net, I think it was called. And it was failing. I actually remember visiting Reid at his company and it was like one of these stark kind of visuals. Like I'd already failed four times, so I was perfectly comfortable with failing companies. But I'd never seen a large scale failing company. And I walked into his office and it was dark, middle of the day. And it was just like, no people there at all, lots of desks. And I was like, wow, this is so depressing. And that's when Peter sort of said, look, you should join our board and maybe you should join our company. And so eventually Reid, of course, joined PayPal as a full-time employee. But at the time he was a board member and so he was mostly hanging out with us and brainstorming.

• 53:21Guy Raz?

  And so you begin to kind of pivot into. Into this idea that maybe you should focus on encrypting money transfers. Is it a year before you make that pivot? Or is it faster?

• 53:34Speaker 03

  Faster. I think by mid spring, late spring 99, we were full steam ahead and we're getting encrypted money.

• 53:43Guy Raz?

  And you changed the name to PayPal at that point?

• 53:46Speaker 03

  Yep. Well, we started the name change process. It took a couple of months to get there.

• 53:51Guy Raz?

  All right. At that time, and this is 1999, your PayPal, it's not yet PayPal that we would know of as PayPal. It's still, the concept is still, like, if I were just, I don't know, if I was just meeting you at a party somewhere and I was not a tech person, I'd say, all right, well, what are you working on? Explain this thing. How's it going to work? Well, like, from the consumer perspective, what would you have said in 1999?

• 54:17Speaker 03

  First of all, he would have walked away thinking, wow, that guy's a nerd. He cannot explain what he works on and, boy, is he awkward. So I'll try to do a better job. I'm not going to channel my 23 year old self. Otherwise, it'll just be long and boring and awkward. But the story I would use is like, hey, so imagine you and your best friend are going out to dinner. And who, anyway, carries cash these days? Cash sucks. Nobody has cash. Nobody wants to have cash.

• 54:44Guy Raz?

  Everybody carries cash. It's 1999. We're all carrying cash.

• 54:48Speaker 03

  Of course. And yes, I frequently would get called out like, what are you talking about? I have cash in my pocket. Do you not have cash in your pocket? I say, well, what if you don't have cash? What if you forgot? What if you need to split the bill? What if it's a business dinner? It's like three people. It's complicated. So what you need is an IOU. But IOUs are super awkward. You're not going to write them down. But if you have a Palm Pilot and they have a Palm Pilot, you can just beam them essentially a promissory note that compels you to pay them back if they cover dinner.

• 55:19Guy Raz?

  And the promissory note would be tied to your bank account?

• 55:22Speaker 03

  It would be a cryptographically secure message that you could later on connect your Palm Pilot to a computer. The message would automatically get processed and then it would go. Against your bank account or your cracker.

• 55:35Guy Raz?

  Oh, wow. Okay. I like that. That's cool.

• 55:37Speaker 03

  You're very generous.

• 55:38Guy Raz?

  No, I like it. I like it because you know what? You know why I like it? Because I know that there are still people out there probably owe me at least 100 bucks. Who are like, I'll pay you back next week. You know, you'd pay for somebody's movie or something like, I'll hit you up later. But I don't remember and I'm sure I owe people like 100, 200 bucks too. So that would have been great.

• 55:55Speaker 03

  There you go.

• 55:55Guy Raz?

  And presumably the business model would be around taking a fee.

• 55:59Speaker 03

  Yeah.

• 55:59Guy Raz?

  Every time the money got transferred. Okay. But at that time, there were other products out there. There was something called DigiCash, I think. Right?

• 56:07Speaker 03

  Oh, yeah.

• 56:08Guy Raz?

  So there were companies that were focused on, you know, ways to transact and, and send money back and forth in an encrypted way. So didn't they already solve the problem that you were trying to solve?

• 56:22Speaker 03

  I think they thought they did, but actually, funny enough, one of my more memorable Silicon Valley inaugural moments, I went to the DigiCash shutdown party. They started this company. It was really well funded. It was supposed to be the digital currency. And it just completely died and like it didn't succeed in the market. So I actually went to the party where they wound it down. It was on Stanford campus of all places, kind of outdoors around this picnic table. And they asked me like, who are you and what are you doing here? And I was like, oh yeah, this idea of like moving money through Ether with digital signatures sounds so cool. And they're like, that's a terrible idea. We just failed at a company doing this. But the reason all the prior experiments failed is really easy to summarize. They were just entirely user unfriendly.

• 57:06Speaker 03

  They were awfully difficult to use as a consumer. And if it's not easy, it's just not going to work with money. Money works pretty well when it's in paper form and it works really well when it's a card form. So if you're trying to push it into an application or into a mobile device, it better be easier and quicker than the existing systems.

• 57:26Guy Raz?

  So how are you guys going to solve that problem? How are you going to make this? You were going to basically make it so easy that you could just beam a digital promissory note to someone else at the dinner table and then that would be it. They connect to their computer and then it would connect to their bank account. And then they would get the money deposited in their account.

• 57:44Speaker 03

  Yeah, I remember.

• 57:47Speaker 03

  Literally drawing buttons, like special on-screen buttons for the Palm Pilot app that we built to be more bubbly, like buttons that look like they had 3D to them, to make them friendlier, to make them look like it's easy and inviting to tap the amount of dollars you get a beam to your friend, because I wanted it to be friendly and easy to trust and consume.

• 58:09Guy Raz?

  But what I'm trying to figure out is, it doesn't, I mean, it's still, there is still friction there. Like, you gotta beam the thing, then dock your device, and then probably connect to the, like, it doesn't sound like it was gonna be a seamless process.

• 58:24Speaker 03

  This is maybe why you have not most likely used PayPal on your Palm Pilot. The simplest user interface always wins.

• 58:35Guy Raz?

  So, November 99, PayPal sort of begins operations. What, as a consumer at that time, what did that mean? Was it a website, or was it still focused on doing it through Palm Pilots?

• 58:49Speaker 03

  So, it was primarily focused on a Palm Pilots. You would go to the PayPal website, and you would see that you can download this application compiled for your Palm Pilot. And because not everybody had a Palm Pilot just yet, you could do cool things like, hey, I will promise you to pay for my Palm Pilot, but you don't actually have to have a Palm Pilot. It'll just reach you via email, and then you would sign up, create an account. So, we kind of made it cross-compatible, Palm to web, Palm to Palm. And as a footnote, we had a web-to-web, very much a demo-quality product that I threw together to just show how this works if you just don't happen to have any Palm Pilots around. And it's that demo that took off like crazy.

• 59:32Guy Raz?

  So, initially, the idea was it was peer-to-peer, like, I send you money, you send me money, promise, I know. And by the way, I imagine that, because we know e-commerce really took a long time for e-commerce to take off, for people to trust it, you know, seven, eight years. So, it's still, when you launched it, it must have been a tiny number of people who were like, yep. I mean, it must have been really, like, early adopters who were confident and felt secure with this.

• 59:59Speaker 03

  Yeah. One of our very first engineers, Russ, made a screensaver that was just floating this number on a screen that showed how many users we had in total who had ever signed up. And it was like, 17. 17.

• 1:00:15Speaker 03

  Like, go home, come back the next morning, they're still 17. So it was growing about that fast.

• 1:00:21Guy Raz?

  When we come back, how in the space of a year PayPal goes from 17 users to hundreds of thousands, and how in the space of three years, it goes through a merger, a management shakeup, an acquisition, and an IPO. Stay with us. I'm Guy Raz, and you're listening to How I Built This.

• 1:00:57Guy Raz?

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• 1:03:17Guy Raz?

  Hey, welcome back to How I Built This. I'm Guy Raz. So it's 1999, and Max and his partners have built a new peer-to-peer payment system, soon to be called PayPal. And almost right away, the service starts to attract one very important user group: people who use eBay.

• 1:03:38Speaker 03

  Back in 99, there really isn't a way to take a credit card payment online if you were trying to sell things. For a business, there were a couple of companies that kind of provided that service. But if you were a normal person just trying to sell something on eBay, it was not a thing. You could not sign up for a business account and process credit cards. And PayPal was this peer-to-peer system that had a web-only interface, which we made as a demo. And you could just tell someone, hey, type in your credit card number and I will charge your card as many dollars as we agreed. And it was like, had an effect of a minor explosion in the eBay community.

• 1:04:18Guy Raz?

  And I think we should be clear here, which is you, you'd mostly created this thing to be used on Palm Pilots, right? I mean, but, but where the explosion was happening was on the web, right? So, I mean, so the web version that you'd originally launched almost as an afterthought. I mean, I think that ended up being like adopted by like 100,000 users in January of 2000.

• 1:04:43Speaker 03

  Yeah, that's right.

• 1:04:44Guy Raz?

  And I think by March of that year, something like a million people were using PayPal. So how did it grow so quickly? I mean, this is not, this is not a time where there's social media marketing, right? Like, were you, were you advertising or was it just people discovering it?

• 1:04:57Speaker 03

  Two things happened. So the eBay seller community was unbelievably self-observing. So anyone able to sell things on eBay would constantly optimize for selling things more and faster. People were starting to make careers out of it. And so the second a seller would see it on someone else's site, they're like, what is this PayPal button? Oh, you click on this and it asks for a credit card number. Like, amazing. And so that was a very important growth vector. And then Luke came up with the original viral marketing idea where he had said, hey, what if we gave every new user who signed up 20 bucks? But not just 20 bucks for signing up, but 20 bucks to the person who invited them.

• 1:05:41Speaker 03

  And so college students in particular were, I think, going on these absolute vendors of inviting their friends and getting us to give them $20. But the eBay growth was entirely natural and it was really based on just sellers spotting other sellers using it.

• 1:05:54Guy Raz?

  I know you were focused on, on the technical side, but you know, you were probably clued in to, to all parts of the business. How did you guys convince the credit card companies and the banks to cooperate?

• 1:06:07Speaker 03

  Some combination of asking forgiveness versus permission.

• 1:06:13Speaker 03

  And just the overall naivete and headiness of the time where we showed up and said, hey, we're going to do this and we promise nothing really bad will happen. We'll do just enough KYC to make sure there's no money laundering and bad people doing things. And they sort of said, okay, well, I guess commerce is good. Credit card processing is good. We like it. But keep in mind, this is pre nine 11 and the world is very, very innocent relative to today back then. This is a, this is before Patriot Act, before extreme focus on things like money laundering and terrorist financing, et cetera, et cetera.

• 1:06:51Guy Raz?

  But one of the biggest challenges you guys faced at the beginning, once you launched, was fraud, right? I mean, the company was like losing millions of dollars a month from fraudsters who were, who were trying to figure out how to outwit the system.

• 1:07:08Speaker 03

  Yeah, we started noticing kind of all these maybe illegitimate transactions, maybe people kind of buying things from themselves and then taking the money out of the system. And then we'd realize that, oh, the credit card they use was actually not theirs. It was stolen. And then it just hit very, very hard sometime in April of 2000. We saw just this enormous attacks primarily from my former homeland or the general region, like all those were the Eastern Bloc countries, basically realizing that this is a very loosely secured financial system. And at the time, the sort of idea of securing private information, things like payment credentials and what's now

• 1:07:49Speaker 03

  called PII, Personal Identifiable Information, was really in its infancy. And so by mid-June, I think I was starting to sort of become aware of the fact that we're probably losing tens of millions of dollars to these fraudulent activities per quarter.

• 1:08:06Guy Raz?

  Wow.

• 1:08:08Guy Raz?

  All right. So as you start to see more and more people adopt this thing, and I don't quite understand this part of the story and what was going on, but there was another, I guess, competing company that was founded around the same time called X.com by Elon Musk. We all know who he is. And he was trying to do, I guess, a similar kind of thing. And I know this because Jeremy Stoppelman, who went on to found Yelp, and we'll get to that later, Jeremy's been on the show in the past. He was working with Elon. And to him, PayPal, you guys were like the enemy.

• 1:08:49Guy Raz?

  It was a battle to the death. But the two companies merged in March of 2000. How did that marriage happen? What do you remember about that?

• 1:08:59Speaker 03

  It's definitely a long and winding story. So the very short version is not only is X.com extremely concurrent to PayPal, it's also literally in the same exact building. We were 394 University, Suite 2. They were Suite 1, which we did not know about. And we realized that our number one competitor was literally our next door neighbor and that had this super charismatic guy, Elon Musk, running it. He'd already sold Zip2, and so he was both successful and wealthy, and he had succeeded in pitching Sequoia Capital. And they came at payments a little bit after we did, but they had some really good ideas that we didn't have. So very quickly, we started just looking at each other and going,

• 1:09:42Speaker 03

  oh, that's a good idea. We'll copy that and vice versa. And we were in a market just beating each other up as hard as we could, primarily by way of offering more aggressive incentives to eBay sellers and buyers to join. That's when the intensity really goes up in like late April, early May 2000. And as this happens, Elon hires this guy, Bill Harris, to run X. And he was one of these guys who could sort of see 1 plus 1 equals 3. Obviously, these companies need to merge instead of beating the crap out of each other in the market. And so he was kind of the primary force behind that merger.

• 1:10:17Guy Raz?

  You guys were mortal enemies, and all of a sudden, you become...

• 1:10:22Guy Raz?

  You know, X.com and PayPal are the same company.

• 1:10:27Guy Raz?

  Did you remember just thinking, wait a minute, this is crazy? Do you remember how you felt about that?

• 1:10:32Speaker 03

  It was definitely a little bit of a adjustment, if you will, in terms of, I mean, by then we knew some of the main characters and I'm sure they knew us. And so we'd sort of appropriately demonize them and made ourselves to hate them. So we had to kind of get to know these people that we merged with and adjust our thinking from one of us will die to actually we need to make it work now. It wasn't without tension. We had definitely some interesting, very loud debates between engineering teams on religious matters between Windows and Unix. But it actually, I remember it kind of feeling initially very awkward and then not feeling very awkward very quickly.

• 1:11:16Guy Raz?

  Was there kind of relief about that in a sense, instead of competing against people like Elon and his team? That you were now all kind of, you know, harnessing your collective power?

• 1:11:27Speaker 03

  I think so. My main concern at the time, I think Peter's as well, was this notion that it was just so completely irrational for these two companies to try to kill each other while the opportunity was so vast. And there were plenty of other competitors, including huge banks that were saying, hey, you know what? We're going to get into payments online too. And just the ability to tell capital markets, hey, there's only one bet you need to make. There's only one company you need to consider funding, et cetera. That was extremely productive.

• 1:12:00Guy Raz?

  When the two companies merged, how, this is around sort of mid 2000. Do you remember how many employees total now this merged company had?

• 1:12:09Speaker 03

  I would say on the order of a couple of hundred in aggregate, maybe less than 200, but not a lot. You could definitely know everyone.

• 1:12:15Guy Raz?

  Okay, so you knew everyone. And then pretty soon after the merger, Elon, Elon becomes CEO and you're in the number two position as CTO. So how did you find working with him at the time?

• 1:12:33Speaker 03

  Sort of combination of amazing and infuriating.

• 1:12:39Speaker 03

  He is very smart. He can be extremely charming and loves debate. He has an engineer's mindset. So for an engineer, which I certainly am, it's a great person to agree or disagree with because it's always rational. It is never, well, you know what? I have a, I've made a decision and now we're going to go left, which I think a lot of engineers find extremely difficult to work with. He and I disagreed on about a million different things, but the debate was always intellectual and civilized.

• 1:13:13Guy Raz?

  Did, I mean, you were younger. You're younger than Elon and Peter. And did you, were you comfortable with sort of him, you know, kind of running the show? And from everything I've read about, and there's a new book, of course, about PayPal and all the people who came out of it. Was that he really kind of saw this as X.com was the sort of the senior partner in this relationship and he was the boss?

• 1:13:37Speaker 03

  If I'm entirely honest, it was never entirely the perfect arrangement for me. Up until that point, I'd never actually worked for anyone in my life. That said, you know, I had never felt a moment of disrespect or resentment towards Elon in a sense that I'd always found him to be incredibly impressive and intellectually honest. And so I didn't enjoy the now do what I say, but I did not question the capabilities of the person saying it.

• 1:14:13Guy Raz?

  I mean, clearly there were tensions growing within PayPal. I mean, Peter was out of the picture, kind of. You were still there. And October of 2000, Elon Musk becomes the CEO. By the end of that calendar year, the board ousted him. They fired him. What do you remember about that? I mean, this was not a personal thing, or maybe it was, but it was, from what I understand, it was really just a fundamental difference in how to operate the company.

• 1:14:47Speaker 03

  Yeah, I remember plenty since I was very intimately involved.

• 1:14:54Speaker 03

  It's fairly hard to unpack, I think, to the sort of uninitiated, I guess.

• 1:15:00Speaker 03

  On one hand, there's all these raging emotions and you hate each other and then you merge. And it's a 50/50 merger, which means just no one knows who won. And that's, by the way, the root of all complexity at PayPalX.com story is that because we sort of settled on this, well, there's not really a senior partner, equities just split evenly, there was no sense of, well, who gets to pack up and go home, basically. And so as this sort of thing unfolded and unfolded and unfolded, the emotions ran very high and people were meeting clandestinely in coffee shops. But it was certainly not personal. In fact, one of the sort of most telling things about Elon is that after the board

• 1:15:41Speaker 03

  coup essentially left him without the CEO job, he wanted to meet one-on-one. And sort of he and I met at the parking lot of PayPal and he sort of said on the curb, I didn't doubt the validity of what just transpired, but I felt incredibly sad for him. And all he said, like, why did you do this? I said, you know, it just seemed like the correct thing to do for the company and I'm really sorry the way it all went down. He said, I understand, but I don't understand. And then we didn't speak for a few years, except for formal interactions in the board. I mean, he stayed on the board and it was extremely awkward to be in board meetings

• 1:16:22Speaker 03

  with Elon where he would sort of sometimes glare at me as I would say things, oh, Peter.

• 1:16:29Speaker 03

  And then PayPal went public and he took me out to this extremely nice dinner and I was sort of like, where's the grudge, man? And he's like, ah, what's the point of holding grudges? It ended well for all of us. It's all good. And so that's basically Elon in a nutshell. He's both a big man and a big man.

• 1:16:48Guy Raz?

  Well, I'm curious, Max, what was your lifestyle like during that time? I mean, it seems like it was such an intense period. Like, I've read about like how you would sleep in your office, like under your desk or like in a sleeping bag.

• 1:17:02Speaker 03

  Yep.

• 1:17:03Guy Raz?

  By the way, did you do that often? Or was that sort of like off and on again?

• 1:17:08Speaker 03

  I did it quite a bit. I will have to admit to this. I had a very strange lifestyle, which in retrospect probably took a few years off my expected lifespan, but certainly slept in the office. There was a restaurant downstairs from our second office, and I knew that it would close at 10:00 PM. And so the 9:58 and a half minutes, I would sprint down the steps to just get under the door of this restaurant and get my first meal of the day. And so on. This was definitely extremely unhealthy lifestyle, but I needed the time to work.

• 1:17:49Guy Raz?

  Well, tell me a little bit about the... I mean, I think one of the benefits of early success, but also downsides, is you get quoted when you're young. And I have some of that myself. So I've read quotes or articles about this time at PayPal, and it sounds... I don't want to caricature, but it sounds like a little bit of a frat culture. And I know that you didn't... One of the things that you did not want, I think specifically, were quote-unquote frat boys. But there was a kind of a confrontational style and this expectation to just fully like live this thing all the time. Or is that not accurate?

• 1:18:32Speaker 03

  I think there's some truth to it and some misunderstanding. So you're totally right. One of the interesting accusations that sometimes is leveled against the early PayPal crew is that... It was this idea of a frat culture. It's actually quite the opposite. You know, if anything, we were screening against this idea of sort of a self-righteous, privileged person who would come in and assume they're right. We wanted to have extremely honest intellectual debate over everything. Like, one of the thing that was really telling about the PayPal culture, we would sometimes slow down a release or a feature or even a decision because we wanted more debate.

• 1:19:17Speaker 03

  That said, it did lead to some extremely intense personalities and blowout arguments and people shouting at each other. The thing that's really, I guess, important to understand is there were, on my memory at least, basically zero personalizations of these debates. Somehow, we all respected one another enough to never say, "And therefore, you're stupid."

• 1:19:44Guy Raz?

  How did PayPal survive the dot-com crash of 2000, 2001?

• 1:19:49Speaker 03

  That squarely goes to the brilliance of Peter Thiel and his nose.

• 1:19:53Guy Raz?

  Who became the CEO, I should say, after Elon was ousted.

• 1:19:57Speaker 03

  That's right. So Peter has this unbelievable ability to sniff market crashes in the air as they approach. And I remember him telling me, "It's all going to get very ugly for startups. Like, we're going to have to raise money. We're going to have to be prepared financially." And he went on this sort of quest of fundraising, but it was very rough. One of the more stark visuals I have from those days, the cafe where Peter and I would hang out, and like, some of our more important recruiting pitches took place there and some important negotiations took place there. It was suddenly closed, it was boarded up. And then all these other shops in Palo Alto were closing up because the startup ecosystem

• 1:20:42Speaker 03

  wasn't really around anymore to support them.

• 1:20:43Guy Raz?

  Wow. So you guys had cash on hand because Peter had raised that money, which enabled you to survive it. All right, so now Elon is out, it's 2001. Peter Thiel is CEO again, and PayPal is growing. I mean, you're doing fine despite the sort of collapsing tech world around you. It felt okay within PayPal. There was no kind of nervousness or panic?

• 1:21:12Speaker 03

  You know, I think we were too busy to be scared. I would love to tell stories of existential dread, but I think my primary concerns were, can we keep the site up? I mean, 2001 for me was largely a year of trying to scale this thing as it was just blowing the doors off with its growth. Every week, the growth would just be so much more than the systems could handle. Every Monday, when eBay auctions would settle, the system would just go down for multiple hours. And at some point, our head of database scalability, who was also a very accomplished blues singer and guitarist, brought his guitars to the office and would play the Monday blues

• 1:21:56Speaker 03

  because we all knew the cycle would crash. And it was this surreal thing. And then he would come back up and we would send an apology and CNN would write a story about how PayPal goes down again. And it was just this thing that would repeat itself. And so as the world was burning in terms of startup in 2001, I was just trying to keep the thing going.

• 1:22:16Guy Raz?

  The company went public in February of 2002, and I think on like day one, the shares were up like 55%. It was an amazing debut on the NASDAQ. When it went public, you were a CTO, Peter was a CEO, I believe. Did you envision your future? I mean, you were still 26, 27. I mean, you were very young. Did you think that this was the beginning of the end for you? Like you were now sort of mentally moving on to something else? Or did you still see PayPal as your career?

• 1:22:51Speaker 03

  I was definitely... Not thinking any of those thoughts. I was still very much in the execution mode. I remember sitting down and thinking, okay, so now I'm at least on paper, very wealthy, but I'm still working just as hard. Like I fell asleep in my car right before driving home and then woke up four hours later, trying to figure out where I was. So like, nothing's changed, except we're now publicly traded. How weird is that? I knew that something was going to change, but I also just was so busy and the war with all the various competitors and eBay was trying to shut us down while also trying to sort of cooperate with us because their seller ecosystem depended on us so much. But the thing that I started registering is that the team was very tired and kind

• 1:23:36Speaker 03

  of the reason ultimately eBay was able to acquire us is because the team was so overloaded over the four years of previous life.

• 1:23:48Guy Raz?

  All right. We know that eBay would acquire you just a few months after you went public, but what you just said is also just unbelievable, right? Which is eBay was trying to shut you down. Explain that. Why?

• 1:24:03Speaker 03

  So in the, I don't remember who came up with this metaphor, but it's a good line. So someone, I think from eBay, said PayPal is throwing a party in eBay's backyard and charging attendance. And I think that's pretty accurate in a sense that we were providing a service to a million plus eBay sellers, helping them collect credit cards online and charging them what we thought was a fair price for it. eBay did not have a revenue share arrangement. We're just a service available to eBay sellers and buyers, except they had their own service that they had fully acquired or acquired and then built up called Billpoint right around the same time as PayPal was founded. They had tried

• 1:24:44Speaker 03

  and tried and tried. They did all sorts of really kind of obvious things like, hey, if you use Billpoint, it's free for six months and then you have to turn off PayPal. And Reed, Reed would send a note to the general counsel saying, hey, I just received this disturbing email in my inbox. This seems to be primed for antitrust investigation, just saying. And so it was kind of a race, which they should have absolutely won because they had a product that was supposed to do what we did, that they owned, that could be built in, that could be promoted much, much, much better than we could.

• 1:25:21Guy Raz?

  So they could have, they could have completely crushed your model. They could have said, we can only use Billpoint on eBay.

• 1:25:26Speaker 03

  That's right. And they tried at various times. And PayPal fans in the seller base basically protested. And eBay was always very, very careful not to step on their sellers' toes too much, because that's where all the revenue came from. And I think at the time, they were very concerned that if PayPal were to get turned off, commerce would slow down and eBay would make a lot less money.

• 1:25:52Guy Raz?

  So even after you went public, you kind of depended on eBay, you needed eBay, you needed to keep them happy, but you also knew they didn't like you. And presumably, you had to start thinking about diversifying your revenue streams because you were so dependent on eBay and you're a public company and your share price would have tanked if eBay kicked you off. So what did you, I mean, what were you guys doing to prepare for that possibility?

• 1:26:16Speaker 03

  That was the great unspoken, or maybe spoken in the PayPal halls concern. So we were diversifying very rapidly. We were going international. We were trying to figure out what PayPal offline looks like. So maybe you go into a Best Buy and you use PayPal to buy things from the shelves instead of from the virtual ones, and signing up all these partners outside of eBay. And yet eBay itself was growing so quickly. All of our attempts to diversify away from the dependency on eBay volume were kind of futile. Imagine you have a company that's just growing 100% year on year, and you're providing payments. You better find something that grows even faster. And there wasn't a whole lot like that going on.

• 1:26:58Speaker 03

  I think one of the things that sort of prepared me for life as an entrepreneur after was this multi-year period where on any given day, we expected eBay to call us and say, okay, you're done. Get off. We don't mind losing all the volume because we're ready. And we had all these double secret and triple secret plans of what we'd do then. But in reality, we all knew that this would be pretty catastrophic. And so brace for impact proactively.

• 1:27:25Guy Raz?

  I mean, what an incredible opportunity that you had at such a young age to experience that kind of uncertainty and volatility. Because that was going to serve, that obviously would serve you well as you, as you advanced in your life and career. But I mean, it's almost like a, you know, business school class, except the consequences are a little different. You're not going to get a bad grade. You're gonna lose all your money.

• 1:27:46Speaker 03

  Yeah, I think the backdrop of coming to the US with nothing, just trying to survive as a multi-time startup failure. Once you get some barnacles of good life on you, that's when you start getting scared. Until you have something to lose, it's not that scary to, to be in this permanent concern state. Like, I certainly remember being really scared, but not so scared that I would go hide or something like that.

• 1:28:17Guy Raz?

  In 2002, right? When, when eBay announced that it was acquiring PayPal. And clearly you were clued in on this because you were part of the leadership team at PayPal. Was that surprising when they came, when they said, hey, you know, maybe we should, maybe we should just acquire you?

• 1:28:36Speaker 03

  No, actually, it was kind of the opposite of a surprise. In fact, it was becoming very, very clear that they were completely dependent on us at this point. And every move they would make was just another point of proof that we were succeeding and their own internal systems was not. And sure enough, this is well before the IPO. They came to us and said, hey, how about we just buy you guys? And so of course, initially, we just said, no, we're doing fine. Thank you very much. Then they came back again and the serpents began. And right as we filed to go public, they came in and said, hey.

• 1:29:12Speaker 03

  Well, we'll buy you, don't go public. And we'd said no. And Peter said, I think this is the last time. I really don't think they're going to come back after we go public. By the way, PayPal had an amazing betting culture. We would bet each other all sorts of things all the time. But I bet Peter a dollar that they would come back in less than six months. And I think twice the amount or something like that. And I won one half of that bet. It took longer than six months, but the valuation was in fact dictated by the market. So it was better than better than 2X.

• 1:29:45Guy Raz?

  Yeah, they paid one and a half billion dollars to acquire PayPal. They acquired PayPal in October of 2002. You're 27. You walk away with on paper, something reportedly about $30 million. You're set.

• 1:30:00Speaker 03

  Yeah. And I left a few months after the acquisition.

• 1:30:05Guy Raz?

  But I read that there's an article that was written in the Times about you in 2007. And you've been quoted in that article saying that the year after eBay purchased PayPal was the worst year of your life.

• 1:30:17Speaker 03

  Yeah.

• 1:30:18Guy Raz?

  Which which sounds nuts, right? Because you got all this money and you're young and you could do whatever you want. I think you had a girlfriend at the time who's now your wife.

• 1:30:28Speaker 03

  Indeed.

• 1:30:29Guy Raz?

  What? And I don't I'm not asking this like with a sense of judgment. I'm just curious. Can you explain how that became the worst year of your life?

• 1:30:38Speaker 03

  I think it was the first time when I had no clear purpose, which quickly became no clear sense of direction. And I would literally wake up in the morning and sit in the PJs that I slept on my newly acquired couch, flip open a laptop and stare at it and think, I'm going to start a company. That's the only thing I know. That's the only thing I want to do. And then I would just sort of sit there and my girlfriend would go to work. And then she would come back and she would find me in the same place. And it went on for a long time. And it was sort of a, you know, I'm not sure that qualifies for depression.

• 1:31:19Speaker 03

  And I have a lot of empathy for people who actually do suffer real mental health issues. But that's about as close as I came to just spinning out entirely mentally out of control. And that was a long year.

• 1:31:31Guy Raz?

  Why didn't you go? I mean, a lot of, a lot of the folks that you worked with went into investing. I mean, obviously Peter Thiel famously, most famously. Did you try that at all?

• 1:31:43Speaker 03

  I did. This is this part of the story. I don't know if I've ever told anybody. So Ruloff, who is now, of course, a, he's the Mr. Sequoia Capital at this point. He's kind of the front man of the band there, invited me to spend some number of months, maybe more, at Sequoia Capital.

• 1:32:01Guy Raz?

  Ruloff was your, he was your, your, your head of finance, right? At PayPal?

• 1:32:05Speaker 03

  Yeah, he was our CFO. And so I started going to Sequoia every day and it was great. I started sitting in on pitches. So I would meet entrepreneurs that were kind of like me, but, you know, four years prior. And then I started noticing that I was really good at ripping into people's ideas. They would bring in this really cool concept. And of course it was half baked. It was just, you know, some bright eyed kid freshly out of college, thinking about, here's what they're going to build. And I would immediately explain to them why I would fail. And I got them so good at stabbing them in the heart that one day I went home and told Nellie, my, my now wife, I don't think I can do this. Like I've, I've become so cynical. I'm now taking out my anger about not being in a startup on other startup founders.

• 1:32:51Guy Raz?

  You, you were quoted at the time, and I'm sorry to read this quote to you because again, if I was quoted when I was 27, I was, probably said some stupid things, I would be embarrassed. But you said to the Times, "I took this perverse pleasure in seeing if I could make someone cry," which does sound a little bit mean.

• 1:33:07Speaker 03

  Yeah, I, I am not sure I was very nice at all at that time.

• 1:33:10Guy Raz?

  And you think that came from this, this place of like, I need to be doing this. Why am I not doing this?

• 1:33:17Speaker 03

  In retrospect, it was probably just envy. I wanted to be defending my idea against all enemies, foreign and domestic. I wanted to be them.

• 1:33:28Guy Raz?

  And that is where we're going to leave Max Levchin's story for now. Next week, we'll be back with part two of our conversation where we'll hear about all the things that Max built since PayPal.

• 1:33:41Speaker 03

  That was sort of this moment of truth where I was like, oh, I know the class of companies I'm going to start. And then I showed it to Ellie and she said, you finally figured yourself out. Just give yourself permission to go build something that's like another PayPal, but better.

• 1:33:56Guy Raz?

  Hey, thanks so much for listening to the show this week. If you want to hear every episode one week early, check out Amazon Music. If you want to listen one week early and ad-free, subscribe to Wondery Plus in Apple Podcasts or on the Wondery app. Please do follow us on your podcast app so you always have the latest episode downloaded. And another way to support our show is by filling out a survey at wondery.com/survey. If you want to contact the team, our email address is [email protected]. If you want to follow us on Twitter, our account is at How I Built This. Mine is at Guy Raz. And on Instagram,

• 1:34:39Guy Raz?

  I'm at Guy dot Raz. This episode was produced by Alex Chung with music composed by Ramtin Arablouei. It was edited by Neva Grant with research help from Claire Murashima. Our production staff also includes J.C. Howard, Casey Herman, Josh Lash, Liz Metzger, Carrie Thompson, Sam Paulson, Catherine Seifer, Elaine Coats, John Isabella, Chris Messini, and Carla Estevez. I'm Guy Raz, and you've been listening to How I Built This.